Chapter 09 - Plant and Intangible Assets
Chapter 09
Plant and Intangible Assets
True / False Questions
1. Incidental costs incurred in the purchase of land that are charged to Land Improvements
will affect net income at some future time.
True False
2. To capitalize an expenditure means charging it to an asset account.
True False
3. Charging an expenditure directly to an expense account is based on the assumption that the
benefits of that expenditure have been used up in the current period.
True False
4. The journal entry to record depreciation expense consists of a credit to Accumulated
Depreciation and a debit to the asset being depreciated.
True False
5. Depreciation is a process of asset valuation.
True False
6. Book value represents the cost of an asset that is yet to be allocated to expense.
True False
7. The half-year convention allows us to take six months depreciation during the first year of
an asset's life even if the asset was purchased on January 25th.
True False
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Chapter 09 - Plant and Intangible Assets
8. The book value of an asset is equal to its cost plus accumulated depreciation.
True False
9. The formula for the double-declining balance method of depreciation is: Remaining book
value times the straight line rate is equal to depreciation expense.
True False
10. The rule of consistency does not require a company to use the same method of
depreciation from year to year for all assets.
True False
11. The term plant assets refers to long-lived assets acquired for use in business operations,
rather than for resale to customers.
True False
12. Any reasonable and necessary expenditures to place a newly acquired plant asset in
service should be debited to a separate asset account.
True False
13. Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
True False
14. Land improvements are not subject to depreciation.
True False
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Chapter 09 - Plant and Intangible Assets
15. It is an acceptable accounting practice to treat an expenditure that is not material in dollar
amount as an expense of the current period even though the expenditure may benefit several
periods.
True False
16. The erroneous recording of a revenue expenditure as a capital expenditure will cause an
overstatement of total revenue for the period.
True False
17. In accounting, depreciation refers to a decline in the asset's current market value, not the
allocation of the cost of an asset to expense.
True False
18. Just as there are depreciation methods to calculate the decline in value of assets, there are
appreciation methods to record the increase in value of assets.
True False
19. If an accelerated depreciation method is used for an asset with a useful life of five years,
more depreciation expense would be recorded in the third year than in the fifth year.
True False
20. Revenue expenditures are a part of selling and administrative expenses.
True False
21. Under the half-year convention, six months' depreciation is recorded on an asset in the
year of acquisition and in the year of retirement regardless of the month in which the asset is
actually purchased or retired.
True False
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Chapter 09 - Plant and Intangible Assets
22. Once the estimated life is determined for a depreciable asset it can never be changed.
True False
23. Annual depreciation expense is increased when salvage values are small.
True False
24. Most companies benefit by using accelerated depreciation methods for income tax
purposes.
True False
25. Goodwill is only recorded when the value of a company increases and not when it
decreases in value.
True False
26. Straight-line is the most widely used depreciation method in financial statements, and
MACRS is the most widely used method in federal income tax returns.
True False
27. The tax basis of a depreciable asset generally is higher than the book value of that asset
for financial reporting purposes.
True False
28. Research and development costs should be capitalized to match the period of benefit.
True False
29. The systematic write-off of intangible assets to expense is called depletion.
True False
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Chapter 09 - Plant and Intangible Assets
30. The balance sheet always reflects a company's current values.
True False
31. U. S. GAAP requires that a company should capitalize goodwill and adjust its value if
subject to impairment.
True False
32. A revenue expenditure is an operating expense.
True False
33. A capital expenditure is charged to owners' capital.
True False
Multiple Choice Questions
34. After March, 2004 international standards required that goodwill:
A. Be capitalized and amortized over 20 years or less.
B. Be capitalized and amortized over 40 years or less.
C. Be capitalized and reviewed annually and its value should be adjusted if impaired.
D. Be expensed immediately.
35. If an asset is determined to be impaired, it should be:
A. Depreciated only using the straight-line method.
B. Written up to its historical cost.
C. Reclassified as a liability.
D. Written down to its fair market value.
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36. All of the following may be considered intangible assets except:
A. Accounts receivables.
B. Copyrights.
C. Franchises.
D. Goodwill.
37. The cost of a new windshield wiper on a delivery vehicle would be classified as:
A. A capital expenditure.
B. A revenue expenditure.
C. Part of the cost of goods sold.
D. An unusual and infrequent expense.
38. When straight-line depreciation is in use, the depreciation rate of an asset is equal to:
A. 1 divided by the life of the asset.
B. 1 divided by the cost of the asset.
C. The cost of the asset divided by the life of the asset.
D. The cost of the asset less its salvage value divided by the life of the asset.
39. When a depreciable asset is sold at a price equal to its book value, a journal entry would
include:
A. A credit to the asset account for its book value.
B. A debit to accumulated depreciation.
C. A credit to accumulated depreciation.
D. A credit to cash.
40. All of the following assets are amortized except:
A. Patents.
B. Franchises.
C. Copyrights.
D. Natural resources.
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41. Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a
survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost
of the land?
A. $256,000.
B. $281,000.
C. $284,600.
D. $282,200.
42. If the 150% declining balance method is being used and an asset has a useful life of 20
years what is the depreciation rate?
A. 7.5%.
B. 10%.
C. 15%.
D. Some other amount.
43. Machinery is purchased on May 15, 2009 for $50,000 with a $5,000 salvage value and a
five year life. The half year convention is followed. What method of depreciation will give the
highest amount of depreciation expense in year 2?
A. Straight line
B. Double declining balance
C. 150% declining balance
D. Amount cannot be determined
44. An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for
$11,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $1,200.
B. A loss of $1,200.
C. A loss of $7,200.
D. A gain of $7,200.
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Chapter 09 - Plant and Intangible Assets
45. The entry to record amortization on a copyright would include:
A. A debit to amortization expense
B. A debit to accumulated amortization
C. A debit to copyright
D. A credit to amortization expense
46. Which of the following would not be considered part of the cost of equipment recently
purchased?
A. Sales tax.
B. Transportation charges.
C. Installation and setup charges.
D. All three are capitalized costs.
47. Armstrong Company recently acquired a new computer system. Which of the following
costs associated with the computer should not be debited to the Equipment account?
A. Insurance coverage purchased by Armstrong to cover the computer during shipment from
the manufacturer.
B. Wages paid to system programmers hired to prepare the new computer for use.
C. Replacement of several circuit boards damaged during installation.
D. Installation of new electrical power supplies required for the computer.
48. Coca-Cola's famous name printed in distinctive typeface is an example of:
A. A trademark.
B. A patent.
C. A copyright.
D. Goodwill.
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Chapter 09 - Plant and Intangible Assets
49. When comparing the units-of-output method of depreciation with straight-line
depreciation:
A. The depreciation expense in the first year will always be greater under units-of-output
method.
B. The depreciation expense in the first year will always be less under the units-of-output
method.
C. The depreciation expense in the first year will always be the same.
D. The depreciation expense in the first year may be greater than, equal to, or less under the
units-of-output method.
50. The fair market value of Lewis Company's net identifiable assets is $5,000,000. Martin
Corporation purchases Lewis' entire business for $5,800,000. Which of the following
statements is not correct?
A. Martin Corporation paid $800,000 for goodwill generated by Lewis Company.
B. Martin feels that Lewis Company has the ability to generate earnings in excess of a normal
return on net identifiable assets.
C. Martin will record amortization expense over a period not to exceed 40 years.
D. Martin Corporation will record $800,000 to goodwill, an intangible asset, which will be
reported in its balance sheet.
51. Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and
an office building with a parking lot. In this situation:
A. The purchase price should be apportioned among the Land, Land Improvement, and
Building accounts.
B. The entire purchase price should be debited to the Plant and Equipment account.
C. Land, Land Improvement, and Building accounts should each be debited for the respective
appraisal value of each item.
D. Allocation of the entire $450,000 to Land results in an understatement of net income in the
current and future accounting periods.
52. Which of the following is a capital expenditure?
A. Sales tax paid in conjunction with the purchase of office equipment.
B. Monthly rent of a delivery truck.
C. Research and development costs.
D. Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket.
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Chapter 09 - Plant and Intangible Assets
53. The legal life of most patents is:
A. 5 years.
B. 20 years.
C. 40 years.
D. 50 years.
54. Which of the following should not be treated as a revenue expenditure?
A. Delivery costs on newly purchased equipment.
B. Annual fire insurance premiums on plant and equipment.
C. Repair to an elevator of a five year old building.
D. The purchase of a pencil sharpener for $10 used in an office.
55. Which of the following is not a capital expenditure?
A. Advertising expenditures to introduce a new product line.
B. Sales tax paid in conjunction with the purchase of new machinery.
C. Installation of elevators to replace escalators.
D. An amount paid to acquire a patent with a remaining life of only three years.
56. The application of the matching principle to depreciation of plant and equipment can best
be described as:
A. The matching of the book value of an asset with its market value.
B. Offsetting the revenue of an accounting period with the estimated decline in value of plant
and equipment during the accounting period.
C. Offsetting revenue of an accounting period with the portion of the cost of plant and
equipment estimated to have been used up during the accounting period.
D. The matching of the depreciation expense reported in the income statement for an
accounting period with the accumulated depreciation reported in the balance sheet.
57. The term accumulated depreciation, as used in accounting, is best defined as:
A. The portion of a plant asset recognized as expense since the asset was acquired.
B. Funds (or cash) set aside to replace the asset being depreciated.
C. Earnings retained in the business that will be used to purchase another asset when the
present asset is depreciated.
D. An expense of doing business.
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Chapter 09 - Plant and Intangible Assets
58. Which depreciation method is most commonly used among publicly owned corporations?
A. Straight-line.
B. Double-declining balance.
C. Units-of-output.
D. All of the various depreciation methods are used equally.
59. The book value of an asset in the plant and equipment category is:
A. The undepreciated cost of the asset.
B. The current replacement cost of the asset.
C. The original cost of the asset.
D. The accumulated depreciation on the asset to date.
60. A gain is recognized on the disposal of plant assets when:
A. The sales price is greater than the residual value but less than the book value.
B. The sales price is less than both the book value and the residual value.
C. The sales price is greater than the book value and greater than the residual value.
D. The sales price is greater than the book value and less than the residual value.
61. Which of the following would not be amortized?
A. Oil well.
B. Copyright.
C. Franchise fee.
D. Patent.
62. An accelerated depreciation method:
A. Results in reporting higher earnings every year.
B. Depreciates an asset over a shorter life than does the straight-line method.
C. Recognizes more depreciation expense in the early years of an asset's useful life and less in
the later years.
D. Is required for assets that become technologically obsolete before they physically wear out.
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Chapter 09 - Plant and Intangible Assets
63. Accelerated depreciation methods are used primarily in:
A. Income tax returns.
B. The financial statements of small businesses.
C. The financial statements of publicly owned corporations.
D. Companies with computer-based accounting systems.
64. Capital expenditures are recorded as:
A. An expense.
B. An asset.
C. A liability.
D. Income.
65. In the fixed-percentage-of-declining-balance depreciation method, the book value of the
asset is multiplied by:
A. An increasing depreciation rate.
B. A constant depreciation rate.
C. A decreasing depreciation rate.
D. A rate that changes each year but is determined from a table.
66. Revenue expenditures are recorded as:
A. An expense.
B. An asset.
C. A liability.
D. Income.
67. Which of the following situations is impossible?
A. Book value is greater than residual value.
B. Book value is equal to the residual value.
C. Book value is less than residual value.
D. Book value is less than the original cost.
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Chapter 09 - Plant and Intangible Assets
68. For depreciable property other than real estate, MACRS is based upon:
A. Either the 150% or 200% declining-balance method.
B. The straight-line method.
C. A 10-year recovery period.
D. The depreciation method and recovery period used by the company in its financial
statements.
69. Which of the following statements about MACRS is not correct?
A. MACRS is the only accelerated depreciation method that may be used on newly acquired
assets for federal income tax purposes.
B. The method permits "depreciating" the asset to a tax basis of $0 over a specified recovery
period.
C. If a company uses MACRS in its income tax returns, it also must use MACRS in its
financial statements.
D. Most businesses would benefit from using MACRS rather than straight-line depreciation in
their income tax returns.
70. The term net identifiable assets means:
A. All assets minus all liabilities.
B. All assets except goodwill, minus all liabilities.
C. All assets except intangibles, minus all liabilities.
D. All fixed assets less liabilities.
71. Responsibility for selection of the depreciation methods used in financial reporting rests
with:
A. Company management.
B. The FASB.
C. The IRS.
D. The CPA firm that audits the company's financial statements.
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Chapter 09 - Plant and Intangible Assets
72. With respect to depreciation policies, the principle of consistency means:
A. A company should use the same depreciation methods in its financial statements that it
uses in its income tax returns.
B. A company should use the same depreciation methods as other companies in the same
industry.
C. A company should use the same depreciation method from year to year for a given plant
asset.
D. A company should use the same depreciation method in computing depreciation expense
on all its assets.
73. The book value of plant assets (other than land):
A. Increases with the passage of time.
B. Decreases with the passage of time.
C. Remains the same with the passage of time.
D. May increase or decrease depending upon the economy.
74. The gain on the disposal of equipment is recognized when:
A. The book value of the equipment is greater than the value received.
B. The book value of the equipment is less than the value received.
C. A salvage value exists.
D. A gain should not be recognized on the disposal of an asset.
75. For financial reporting purposes, the gain or loss on the sale of a plant asset is determined
by comparing the asset's:
A. Cost with its book value.
B. Sales price with its book value.
C. Tax basis with its book value.
D. Sales price with its tax basis.
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Chapter 09 - Plant and Intangible Assets
76. The gain or loss on the disposal of a depreciable asset reported in financial statements
often differs from that reported for income tax purposes. The principal reason for the
difference is:
A. The cost of the asset is different for financial reporting and income tax purposes.
B. The sales price of the asset is different for financial reporting and income tax purposes.
C. Different depreciation methods have been used in financial statements and in income tax
returns.
D. The company has made an error because the same amount of gain or loss should appear in
the income tax return as in the financial statements.
77. When a company uses straight-line depreciation and the half-year convention, assets with
a five-year life:
A. Will have the same depreciation expense in the first and last years.
B. Will be depreciated over six accounting years.
C. Book value will equal its salvage value at the end of its economic life.
D. All of the above statements are correct.
78. Which of the following assets is not subject to depreciation and whose usefulness does not
decline over time?
A. Patents.
B. Copyrights.
C. Land.
D. Coal mine.
79. Intangible assets are assets used in business operations but which:
A. Lack physical substance.
B. Cannot be sold.
C. Have been depreciated below their estimated salvage values.
D. Cannot be specifically identified.
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Chapter 09 - Plant and Intangible Assets
80. For the financial statements of publicly traded companies, MACRS:
A. Is recommended.
B. Is required.
C. Is optional.
D. Is not considered to be in conformity with GAAP.
81. The inclusion of the intangible asset goodwill in the financial statements of a company
indicates:
A. That the company has a favorable reputation with its customers.
B. A monopoly position in the industry or superior management.
C. An unbroken record of annual earnings and dividends.
D. That the company has purchased a going business at a price in excess of the fair market
value of the net identifiable assets.
82. Expenditures for research and development intended to lead to new products of
commercial value:
A. Should be recorded as intangible assets and amortized during the years in which benefits
are expected.
B. Should be charged to expense when incurred.
C. Should be capitalized only if patents are expected to be granted.
D. Should be classified as deferred charges.
83. The basic purpose of the matching principle is to allocate the cost of an asset to expense
over the years in which the asset contributes to revenue. Current accounting practice does not
strictly apply this principle to expenditures for:
A. Natural resources.
B. Research and development.
C. Trademarks.
D. Equipment.
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Chapter 09 - Plant and Intangible Assets
84. The adjusting entries to record depreciation or amortization expense or to write down
assets that have become impaired:
A. Reduce both net income and cash balances.
B. Reduce net income, but have no direct effect on cash balances.
C. Decrease cash balances, but have no direct effect upon net income.
D. Affect neither net income nor cash balances.
85. Harvard Company purchased equipment having an invoice price of $11,500. The terms of
sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a
$160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as
the cost of this equipment is:
A. $11,845.
B. $12,776.
C. $11,615.
D. $12,546.
86. Land and a warehouse were acquired for $890,000. What amounts should be recorded in
the accounting records for land and for the warehouse if an appraisal showed the estimated
values to be $400,000 for the land and $700,000 for the warehouse?
A. $400,000 for land; $490,000 for warehouse.
B. $323,960 for land; $566,040 for warehouse.
C. $400,000 for land; $700,000 for warehouse.
D. $190,000 for land; $700,000 for warehouse.
87. On March 2, 2009, Glen Industries purchased a fleet of automobiles at a cost of $550,000.
The cars are to be depreciated by the straight-line method over five years with no salvage
value. Glen uses the half-year convention to compute depreciation for fractional periods. The
book value of the fleet of automobiles at December 31, 2010, will be:
A. $165,000.
B. $400,000.
C. $495,000.
D. $385,000.
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Chapter 09 - Plant and Intangible Assets
88. On April 8, 2009, Jupitor Corp. acquired equipment at a cost of $480,000. The equipment
is to be depreciated by the straight-line method over six years with no provision for salvage
value. Depreciation for fractional years is computed by rounding the ownership period to the
nearest month. Depreciation expense recognized in 2009 will be:
A. $53,333.
B. $66,667.
C. $60,000.
D. $80,000.
On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this
machinery is estimated at 8 years, with an $8,000 residual value.
89. Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and the half-year convention. Depreciation expense recognized
on this machinery in 2009 and 2010 will be:
A. $7,500 in 2009 and $11,000 in 2010.
B. $6,000 in 2009 and $12,000 in 2010.
C. $5,000 in 2009 and $10,000 in 2010.
D. $5,500 in 2009 and $11,000 in 2010.
90. Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and rounds depreciation for fractional years to the nearest
month. Depreciation expense recognized on this machinery in 2009 and 2010 will be:
A. $2,333 in 2009 and $7,000 in 2010.
B. $5,833 in 2009 and $10,000 in 2010.
C. $6,667 in 2009 and $10,000 in 2010.
D. $10,000 in 2009 and $10,000 in 2010.
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Chapter 09 - Plant and Intangible Assets
91. Refer to the information above. Assume that in its financial statements, Tilton Products
uses the 200%-declining-balance method and the half-year convention. Depreciation expense
in 2009 and 2010 will be:
A. $11,000 in 2009 and $19,250 in 2010.
B. $22,000 in 2009 and $12,571 in 2010.
C. $22,000 in 2009 and $7,857 in 2010.
D. $11,000 in 2009 and $22,000 in 2010.
92. Refer to the information above. Assume that in its financial statements, Tilton Products
uses the 150%-declining-balance method and the half-year convention. Depreciation expense
in 2009 and 2010 will be:
A. $8,250 in 2009 and $14,953 in 2010.
B. $16,500 in 2009 and $12,964 in 2010.
C. $16,500 in 2009 and $16,500 in 2010.
D. $15,000 in 2009 and $11,786 in 2010.
93. Refer to the information above. In the year 2015, Tilton Products sells this machinery for
$4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its
estimated residual value of $8,000. This sale results in:
A. A $3,500 loss in both the company's financial statements and income tax return.
B. No gain or loss in either the financial statements or income tax return.
C. A $3,500 loss in the financial statements, a $3,500 gain in the income tax return.
D. A $3,500 loss in the financial statements, but no gain or loss in the income tax return.
On April 2, 2009, Victor, Inc. acquired a new piece of filtering equipment. The cost of the
equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful
lifetime of 4 years.
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Chapter 09 - Plant and Intangible Assets
94. Refer to the information above. Assume that in its financial statements, Victor uses
straight-line depreciation and rounds depreciation for fractional years to the nearest whole
month. Depreciation recognized on this equipment in 2009 and 2010 will be:
A. $23,333 in 2009 and $35,000 in 2010.
B. $40,000 in 2009 and $30,000 in 2010.
C. $20,000 in 2009 and $35,000 in 2010.
D. $26,250 in 2009 and $35,000 in 2010.
95. Refer to the information above. Assume that in its financial statements, Victor uses
straight-line depreciation and the half-year convention. Depreciation recognized on this
equipment in 2009 and 2010 will be:
A. $40,000 in 2009 and $30,000 in 2010.
B. $23,333 in 2009 and $30,000 in 2010.
C. $17,500 in 2009 and $35,000 in 2010.
D. $20,000 in 2009 and $35,000 in 2010.
96. Refer to the information above. If Victor uses straight-line depreciation with the half-year
convention, the book value of the equipment at December 31, 2010 will be:
A. $90,000.
B. $107,500.
C. $106,667.
D. $105,000.
97. Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful
life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used.
On January 1, following six full years of use of the machinery, management decided that the
estimate of useful life had been too long and that the machinery would have to be retired after
three years, that is, at the end of the ninth year of service. Under this revised estimate, the
depreciation expense for the seventh year of use would be:
A. $8,000.
B. $10,000.
C. $13,000.
D. $24,000.
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Chapter 09 - Plant and Intangible Assets
98. Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated
depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under
these circumstances, the original cost of the asset must have been:
A. $65,000.
B. $75,000.
C. $100,000.
D. $110,000.
99. Mayer Instrumentation sold a depreciable asset for cash of $300,000. The original cost of
the asset was $1,200,000. Mayer recognized a gain of $45,000 on the sale. What was the
amount of accumulated depreciation on the asset at the time of its sale?
A. $945,000.
B. $255,000.
C. $1,155,000.
D. $990,000.
100. Suffolk Associates sold office furniture for cash of $42,000. The accumulated
depreciation at the date of sale amounted to $38,000, and a gain of $18,000 was recognized on
the sale. The original cost of the asset must have been:
A. $31,000.
B. $62,000.
C. $84,000.
D. $59,000.
101. Total stockholders' equity of Tucker Company is $4,000,000. The fair market value of
Tucker's net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation
makes an offer to purchase Tucker's entire business for $5,800,000. In this situation:
A. Tucker Company should report goodwill of $800,000 in its balance sheet.
B. Tucker Company should report goodwill of $1,800,000 in its balance sheet.
C. Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and
Empire will report this goodwill in its balance sheet if the purchase is finalized.
D. Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and
Empire will report this goodwill in its balance sheet if the purchase is finalized.
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Chapter 09 - Plant and Intangible Assets
102. Early in the current year, Tokay Co. purchased the Silverton Mine at a cost of
$20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a residual
value of $5,000,000 after mining operations are completed. During the year, 105,000 tons of
ore were removed from the mine. At year-end, the book value of the mine (cost minus
accumulated depletion) is:
A. $15,000,000.
B. $12,125,000.
C. $7,875,000.
D. Less than $10,000,000.
103. In February 2009, Brilliant Industries purchased the Topaz Mine at a cost of
$10,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual
value of $500,000 after mining operations are completed. During 2009, 50,000 carats of stone
were removed from the mine and sold. In this situation:
A. The book value of the mine is $9,000,000 at the end of 2009.
B. The amount of depletion deducted from revenue during 2009 is $950,000.
C. The amount of depletion deducted from revenue during 2009 is $1,000,000.
D. The mine is classified as an intangible asset and amortized over a period not to exceed 40
years.
104. Land is purchased for $456,000. Additional costs include a $30,300 fee to a broker, a
survey fee of $3,400, $2,750 to construct a fence, and a legal fee of $12,500. What is the cost
of the land?
A. $456,000.
B. $486,300.
C. $502,200.
D. $504,950.
105. An asset which costs $97,600 and has accumulated depreciation of $82,000 is sold for
$18,000. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $15,600.
B. A loss of $15,600.
C. A loss of $2,400.
D. A gain of $2,400.
9-22
Chapter 09 - Plant and Intangible Assets
106. Yale Company purchased equipment having an invoice price of $21,500. The terms of
sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320
delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the
cost of this equipment is:
A. $21,070.
B. $21,500.
C. $21,740.
D. $22,923
107. Early in the current year, Amazon Co. purchased the Rio Silver Mine at a cost of
$30,000,000. The mine was estimated to contain 400,000 tons of ore and to have a residual
value of $7,500,000 after mining operations are completed. During the year, 115,000 tons of
ore were removed from the mine. At year-end, the book value of the mine is:
A. $22,500,000.
B. $6,468,750.
C. $23,531,250.
D. $30,000,000.
108. In February 2012, Gemstone Industries purchased the Opal Mine at a cost of
$20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual
value of $1,000,000 after mining operations are completed. During 2012, 50,000 carats of
stone were removed from the mine and sold. In this situation:
A. The book value of the mine is $19,000,000 at the end of 2012.
B. The amount of depletion deducted from revenue during 2012 is $1,900,000.
C. The amount of depletion deducted from revenue during 2012 is $1,000,000.
D. The mine is classified as an intangible asset and amortized over a period not to exceed 40
years.
109. Lewis Imports sold a depreciable plant asset for cash of $135,000. The accumulated
depreciation amounted to $170,000, and a loss of $15,000 was recognized on the sale. Under
these circumstances, the original cost of the asset must have been:
A. $120,000.
B. $155,000.
C. $185,000.
D. $320,000.
9-23
Chapter 09 - Plant and Intangible Assets
110. Cranston Instrumentation sold a depreciable asset for cash of $150,000. The original cost
of the asset was $600,000. Cranston recognized a gain of $22,500 on the sale. What was the
amount of accumulated depreciation on the asset at the time of its sale?
A. $472,500.
B. $127,500.
C. $577,500.
D. $495,000.
111. Glouchester Associates sold office equipment for cash of $142,000. The accumulated
depreciation at date of sale amounted to $138,000, and a gain of $18,000 was recognized on
the sale. The original cost of the asset must have been:
A. $260,000.
B. $262,000.
C. $280,000.
D. $156,000.
112. An asset which costs $14,400 and has accumulated depreciation of $8,000 is sold for
$5,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $800.
B. A loss of $800.
C. A loss of $2,400.
D. A gain of $2,400.
113. An asset which costs $28,800 and has accumulated depreciation of $6,000 is sold for
$21,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $1,200.
B. A loss of $1,200.
C. A loss of $7,200.
D. A gain of $7,200.
Essay Questions
9-24
Chapter 09 - Plant and Intangible Assets
114. Accounting terminology. Listed below are nine technical accounting terms introduced in
this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or Answer
"None" if the statement does not correctly describe any of the terms.
____ (a.) An expenditure to pay an expense of the current period.
____ (b.) The accelerated depreciation system used in federal income tax returns for
depreciable assets purchased after 1986.
____ (c.) A policy that fractional-period depreciation on assets acquired or sold during the
period should be computed to the nearest month.
____ (d.) An intangible asset representing the present value of future earnings in excess of
normal return on net identifiable assets.
____ (e.) Expenditures that could lead to the introduction of new products, but which,
according to the FASB, should be viewed as an expense of the current accounting period.
____ (f.) Depreciation methods that take less depreciation in the early years of an asset's
useful life, and more depreciation in the later years.
____ (g.) An account showing the portion of the cost of a plant asset that has been written off
to date as depreciation expense.
9-25
Chapter 09 - Plant and Intangible Assets
115. Determining cost of plant assets
New equipment was purchased by Hunter Corporation at a list price of $94,000, with credit
terms of 2/10, n/30. Payment was made within the discount period and included $7,800 sales
tax in addition to the net purchase price. The company also paid delivery charges of $940 and
labor costs of $1,380 for installing the new equipment at the appropriate location. During
installation, an inexperienced employee punctured several containers with a forklift, causing
damage to the equipment. Cost to repair the damage was $1,960. What is the total cost of
Hunter's equipment?
116. Depreciation in financial statements
Dynasty Co. uses straight-line depreciation in its financial statements, with depreciation for a
partial year rounded to the nearest full month.
On September 28, 2006 Dynasty purchased equipment at a cost of $140,000. For financial
reporting purposes, the useful life of this equipment was estimated at 5 years, with a $30,000
salvage value.
Compute the depreciation expense relating to this equipment that Dynasty will recognize in its
financial statements in the following years. If no depreciation will be recognized in a
particular year, write zero.
9-26
Chapter 09 - Plant and Intangible Assets
117. Various depreciation methods-first year
On September 5, 2009, Apollo purchased equipment costing $40,000, with an estimated life
of 6 years and an estimated salvage value of $4,000.
Compute the depreciation expense Apollo would recognize on this equipment in 2009,
assuming:
118. Various depreciation methods-first year
On March 24, 2009 Tastee Ice Cream Co. purchased equipment costing $140,000, with an
estimated life of 5 years and an estimated salvage value of $20,000. Compute the depreciation
expense Tastee would recognize on this equipment in 2009, assuming:
9-27
Chapter 09 - Plant and Intangible Assets
119. Various depreciation methods--two years
On September 6, 2010, East River Tug Co. purchased a new tugboat for $400,000. The
estimated life of the boat was 20 years, with an estimated residual value of $40,000.
Compute the depreciation on this tugboat in 2010 and 2011 using the following methods.
Apply the half-year convention. (If necessary, round to the nearest dollar.)
120. Declining balance depreciation
On July 6, 2011, Grayson purchased new machinery with an estimated useful life of 10 years.
The cost of the equipment was $80,000, with a residual value of $8,000.
Compute the depreciation on this machinery in 2011 and 2012 using each of the following
methods.
9-28
Chapter 09 - Plant and Intangible Assets
121. Depreciation; gains and losses in financial statements
In 2010, Amalfi, Inc. purchased equipment with an estimated 10-year life for $42,600. The
residual value was estimated at $9,900. Amalfi uses straight-line depreciation and applies the
half-year convention.
On April 18, 2012, Amalfi closed one of its plants and sold this equipment for $33,600. Under
these assumptions, compute the following for this equipment:
122. Trade-ins
Dietz owned a delivery van with a book value of $2,000. It traded this old van in on a new
one which cost $16,000. The dealer allowed Dietz a trade-in allowance of $3,500 on the old
van, and Dietz paid the remainder in cash.
Compute the following:
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Chapter 09 - Plant and Intangible Assets
123. Depreciation and disposal--a comprehensive problem
Domino, Inc uses straight-line depreciation with a half-year convention in its financial
statements. On March 10, 2006, Domino acquired a computer system at a cost of $98,800.
Estimated useful life is six years, with residual value of $5,200.
(a) Complete the following schedule, showing depreciation expense Domino expects to
recognize each year in the financial statements.
(b) Assume Domino sells the computer system on October 3, 2009, for $26,650.
9-30
Chapter 09 - Plant and Intangible Assets
124. Computation of goodwill
The income of Greystone, Inc., during the last several years has averaged $765,000 annually.
The company is now being offered for sale as a going concern. The value of Greystone's net
identifiable assets (total assets minus all liabilities) at the present time is $4,675,000.
One of several corporations interested in buying Greystone, offers to pay an amount equal to
the value of the net identifiable assets and to assume all liabilities. In addition, this
prospective buyer is willing to pay for goodwill an amount equal to net earnings in excess of
10% on net assets, expected to continue four years.
You are to use the above information as a basis for computing the price that the investing
corporation will offer for Greystone, Inc. $_______________
125. Computation of goodwill
Chopin Corporation has net assets (total assets minus total liabilities) valued at $880,000 and
has earned an average net income of $132,000 per year for the past several years. Sands
Company is negotiating the purchase of the company and has agreed to pay an amount equal
to the value of the net identifiable assets, assume the liabilities, and pay a sum for goodwill
equal to the earnings in excess of 12% on net assets, expected to continue for five years. What
is the amount for goodwill Sands is including in its offer? $_______________
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Chapter 09 - Plant and Intangible Assets
126. Caan purchased the Stokes Mine for $60 million. The mine was estimated to contain 6
million tons of anthracite coal and to have a residual value of $12 million. During the first
year of mining operations of the Stokes Mine, 800,000 tons of anthracite were mined of which
600,000 tons was sold.
9-32
Chapter 09 - Plant and Intangible Assets
127. Four events pertaining to plant assets are described below.
(a) Computed depreciation for use in the annual income tax return (a different method is used
in the financial statements).
(b) Made a year-end adjusting entry to record depreciation expense for financial reporting
purposes.
(c) Sold old equipment for cash at a price below its book value, but above its income tax
basis.
(d) Traded an old automobile in on a new one. The dealer granted a trade-in allowance on the
old vehicle that was substantially above its book value and its tax basis. However, the trade-in
allowance amounted to only a small portion of the price of the new car; most of the purchase
price was paid in cash.
Indicate the immediate effects of each of these events upon the financial measurements in the
four column headings listed below. Use the code letters, I for increase, D for decrease, and
NE for no effect.
Note: Indicate only the immediate effects of each transaction. Do not attempt to anticipate
how changes in taxable income will affect future cash flows.
128. Briefly explain the difference between a revenue expenditure and a capital expenditure.
9-33
Chapter 09 - Plant and Intangible Assets
129. Effects of depreciation on income and cash flows
In its financial statements, Flysafe Airlines has for many years depreciated its aircraft over an
estimated useful life of 12 years. In preparing this year's financial statements, management
decided to revise the estimate from 12 years to 15. Briefly explain how this revision in
estimated life is likely to affect this year's:
(a) Net income.
(b) Net cash flow.
(c) Taxable income.
130. Gains and losses in financial statements and tax returns
Explain why the amount of gain or loss resulting from the sale of a depreciable asset usually
differs between the seller's financial statements and income tax return. In which of these
accounting reports is the gain usually larger (or the loss smaller)? Explain your reasoning.
131. Goodwill-financial reporting considerations
Cabot Corporation's balance sheet at December 31, 2009, includes an asset entitled goodwill
in the amount of $900,000, net of accumulated amortization.
(a) Briefly explain what is meant by the term goodwill.
(b) Under what circumstances is goodwill recorded in the accounting records? Include in your
Answer a specific situation in which Cabot would have recorded the goodwill mentioned
above.
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Chapter 09 - Plant and Intangible Assets
132. Research and development-financial reporting
Alert Industries has spent $5 billion over the last three years in developing a new drug labeled
BJ13. FDA approval is expected by the end of the month, at which time the drug will be
available for sale. None of Alert's competitors has a product similar to BJ13, and the medical
community is anxiously awaiting availability of this drug. Although BJ13 promises to be a
"wonder drug" with huge financial success, Alert's income statements for the last few years
have shown substantial losses and Alert's balance sheet does not include product BJ13 among
the assets of the business.
Explain why one of Alert's seemingly most valuable assets apparently has been omitted from
the balance sheet, and why Alert's income statements for the past few years reported
substantial losses.
133. Prepare journal entries for the following
9-35
Chapter 09 - Plant and Intangible Assets
134. The following expenditures are related to land, land improvements, and buildings, which
were acquired on November 1, 2009.
Required:
Determine the cost of the land, the building and the improvements (Round to the nearest
dollar)
Prepare journal entries on December 31, 2009 for depreciation assuming the building will
have a useful life of 20 years and no residual value. Use double declining balance method and
the half-year convention. Depreciate the land improvements using straight-line method, a 5
year life, to the nearest month with zero residual value (to the nearest dollar).
Multiple Choice Questions
On March 12, 2008, Shoreham, Inc. acquired melting equipment for $45,600. The estimated
life of the equipment is 6 years, with an estimated residual value of $2,400.
9-36
Chapter 09 - Plant and Intangible Assets
135. In its financial statements, Shoreham uses straight-line depreciation with the half-year
convention. The book value of the equipment at December 31, 2009, will be:
A. $26,600.
B. $42,000.
C. $34,800.
D. Some other amount.
136. In its financial statements, Shoreham uses double-declining-balance depreciation with
half-year convention. The book value of the equipment at December 31, 2009, will be:
A. $20,267.
B. $12,667.
C. $25,333.
D. Some other amount.
137. Sayville Dairy sold a delivery truck for cash of $8,680. The original cost of the truck was
$33,600, and a loss of $5,320 was recognized on the sale. The accumulated depreciation at the
date of sale must have been:
A. $24,920.
B. $14,560.
C. $3,360.
D. $19,600.
138. Cage Corporation purchases Presley Company's entire business for $2,700,000. The fair
market value of Presley's net identifiable assets is $2,400,000.
A. Presley should record goodwill of $300,000.
B. Cage paid $300,000 for goodwill generated by Presley.
C. Cage should charge the $300,000 excess paid for Presley Company directly to expense.
D. Presley should record amortization over a period not to exceed 40 years.
9-37
Chapter 09 - Plant and Intangible Assets
139. Throughout the current year, Calverton Company treated sales taxes paid on purchases of
plant assets as revenue expenditures. As a result, the current year's:
A. Net income is overstated.
B. Revenue is overstated.
C. Depreciation expense is understated.
D. None of the above; payments of sales taxes should be treated as revenue expenditures.
On May 5, 2009, Lloyd purchased a machine for $84,000. The estimated life of the machine
was 10 years, with an estimated residual value of $10,000. The service life in terms of
"output" is estimated at 8,000 hours of operation.
140. Assume Lloyd uses straight-line depreciation with the half-year convention.
Depreciation expense to be recognized in 2009 (the year of purchase) is:
A. $7,400.
B. $8,400.
C. $3,700.
D. Some other amount.
141. Assume Lloyd uses 200%-declining-balance depreciation with the half-year convention.
Depreciation expense to be recognized in 2010 (the second year of ownership) is:
A. $8,400.
B. $13,120.
C. $15,120.
D. Some other amount.
142. Assume Lloyd uses 150%-declining-balance depreciation with the half-year convention.
Depreciation expense to be recognized in 2009 (the year of purchase) is:
A. $8,400.
B. $6,300.
C. $12,600.
D. Some other amount.
9-38
Chapter 09 - Plant and Intangible Assets
143. Assume Lloyd uses the units-of-output method and that the machine was in operation for
1,000 hours in 2009 and 1,800 hours in 2010. The book value of the machine at December 31,
2010 is:
A. $48,100.
B. $58,100.
C. $25,900.
D. Some other amount.
Short Answer Questions
On April 8, 2010, Dreamland Park purchased a ferris wheel for $300,000. The estimated life
of the ferris wheel was 10 years, with an estimated residual value of $60,000. The service life
in terms of output is estimated at 30,000 hours of operation.
Compute the depreciation on this ferris wheel in 2010 and 2011 using the following methods.
2010 2011
9-39
Chapter 09 - Plant and Intangible Assets
144.
Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winning stallion on
January 1, 2003. The stallion is depreciated on a straight-line basis, with depreciation for
partial years rounded to the nearest month. Estimated useful life was nine years, with no
residual value. After owning the animal for six years and five months, Louisville Farms sold
the stallion on May 31, 2009, for cash of $85,000. Depreciation had last been recorded on
December 31, 2008.
9-40
Chapter 09 - Plant and Intangible Assets
145. Compute to the nearest full month depreciation for the fractional period from January 1,
2009 to May 31 of 2009. $______________
146. Compute the book value of the stallion at May 31, 2009, the date of sale.
$______________
147. Compute the gain or loss on the sale of the stallion. $______________ (gain/loss)
9-41
Chapter 09 - Plant and Intangible Assets
148. In the space provided below, prepare the journal entry to record the sale of the stallion on
May 31, 2009. (Use Breeding Stock as the title of the asset account. Assume that depreciation
to date of sale already has been recorded.)
Multiple Choice Questions
149. In which of the following situations should the named company not record any
depreciation expense on the asset described?
A. Commuter Airline is required by law to maintain its aircraft in "as good as new" condition.
B. Metro Advertising owns an office building that has been increasing in value each year
since it was purchased.
C. Computer Sales Company has in inventory a new type of computer designed "never to
become obsolete."
D. None of the above answers is correct―in each case, the named company should record
depreciation on the asset described.
9-42
Chapter 09 - Plant and Intangible Assets
150. Which of the following statements is (are) correct?
A. Accumulated depreciation represents a fund being accumulated for the replacement of
plant assets.
B. The cost of a machine includes the cost of repairing damage to the machine during the
installation process.
C. A company may use different depreciation methods in its financial statements and its
income tax return.
D. The use of an accelerated depreciation method causes an asset to wear out more quickly
than does use of the straight-line method.
151. On April 1, 2010, Sanders Construction paid $10,000 for equipment with an estimated
useful life of 10 years and a residual value of $2,000. The company uses the double-decliningbalance method of depreciation and applies the half-year convention to fractional periods. In
2011, the amount of depreciation expense to be recognized on this equipment is:
A. $1,600.
B. $1,400.
C. $1,280.
D. Some other amount.
152. Evergreen Mfg. is a rapidly growing company that acquires more equipment every year.
Evergreen uses straight-line depreciation in its financial statements and MACRS in its tax
returns. Identify all correct statements:
A. Using straight-line depreciation in the financial statements instead of an accelerated
method increases Evergreen's reported net income.
B. Using straight-line depreciation in the financial statements instead of an accelerated
method increases Evergreen's annual net cash flow.
C. Using an accelerated method instead of straight-line in income tax returns increases
Evergreen's net cash flow.
D. As long as Evergreen keeps growing, it will report more depreciation in its income tax
returns each year than it does in its financial statements.
9-43
Chapter 09 - Plant and Intangible Assets
153. Ladd Company sold a plant asset that originally had cost $50,000 for $22,000 cash. If
Ladd correctly reports a $5,000 gain on this sale, the accumulated depreciation on the asset at
the date of sale must have been:
A. $33,000.
B. $28,000.
C. $23,000.
D. Some other amount.
154. In which of the following situations would Martinez Industries include goodwill in its
balance sheet?
A. The fair market value of Martinez's net identifiable assets amounts to $2,000,000. Normal
earnings for this industry is 15 percent of net identifiable assets. Martinez's net income for the
past five years has averaged $390,000.
B. Martinez spent $800,000 during the current year for research and development for a new
product which promises to generate substantial revenue for at least 10 years.
C. Martinez acquired Baxter Electronics at a price in excess of the fair market value of
Baxter's net identifiable assets.
D. A buyer wishing to purchase Martinez's entire operation has offered a price in excess of
the fair market value of Martinez's net identifiable assets.
9-44
Chapter 09 - Plant and Intangible Assets
Chapter 09 Plant and Intangible Assets Answer Key
True / False Questions
1. Incidental costs incurred in the purchase of land that are charged to Land Improvements
will affect net income at some future time.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
2. To capitalize an expenditure means charging it to an asset account.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
3. Charging an expenditure directly to an expense account is based on the assumption that the
benefits of that expenditure have been used up in the current period.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
9-45
Chapter 09 - Plant and Intangible Assets
4. The journal entry to record depreciation expense consists of a credit to Accumulated
Depreciation and a debit to the asset being depreciated.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
5. Depreciation is a process of asset valuation.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
6. Book value represents the cost of an asset that is yet to be allocated to expense.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-46
Chapter 09 - Plant and Intangible Assets
7. The half-year convention allows us to take six months depreciation during the first year of
an asset's life even if the asset was purchased on January 25th.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
8. The book value of an asset is equal to its cost plus accumulated depreciation.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9. The formula for the double-declining balance method of depreciation is: Remaining book
value times the straight line rate is equal to depreciation expense.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-47
Chapter 09 - Plant and Intangible Assets
10. The rule of consistency does not require a company to use the same method of
depreciation from year to year for all assets.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
11. The term plant assets refers to long-lived assets acquired for use in business operations,
rather than for resale to customers.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
12. Any reasonable and necessary expenditures to place a newly acquired plant asset in
service should be debited to a separate asset account.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-48
Chapter 09 - Plant and Intangible Assets
13. Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
14. Land improvements are not subject to depreciation.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
15. It is an acceptable accounting practice to treat an expenditure that is not material in dollar
amount as an expense of the current period even though the expenditure may benefit several
periods.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
9-49
Chapter 09 - Plant and Intangible Assets
16. The erroneous recording of a revenue expenditure as a capital expenditure will cause an
overstatement of total revenue for the period.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
17. In accounting, depreciation refers to a decline in the asset's current market value, not the
allocation of the cost of an asset to expense.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
18. Just as there are depreciation methods to calculate the decline in value of assets, there are
appreciation methods to record the increase in value of assets.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-50
Chapter 09 - Plant and Intangible Assets
19. If an accelerated depreciation method is used for an asset with a useful life of five years,
more depreciation expense would be recorded in the third year than in the fifth year.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
20. Revenue expenditures are a part of selling and administrative expenses.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
21. Under the half-year convention, six months' depreciation is recorded on an asset in the
year of acquisition and in the year of retirement regardless of the month in which the asset is
actually purchased or retired.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-51
Chapter 09 - Plant and Intangible Assets
22. Once the estimated life is determined for a depreciable asset it can never be changed.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
23. Annual depreciation expense is increased when salvage values are small.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
24. Most companies benefit by using accelerated depreciation methods for income tax
purposes.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-52
Chapter 09 - Plant and Intangible Assets
25. Goodwill is only recorded when the value of a company increases and not when it
decreases in value.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
26. Straight-line is the most widely used depreciation method in financial statements, and
MACRS is the most widely used method in federal income tax returns.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
27. The tax basis of a depreciable asset generally is higher than the book value of that asset
for financial reporting purposes.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-53
Chapter 09 - Plant and Intangible Assets
28. Research and development costs should be capitalized to match the period of benefit.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
29. The systematic write-off of intangible assets to expense is called depletion.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
30. The balance sheet always reflects a company's current values.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
31. U. S. GAAP requires that a company should capitalize goodwill and adjust its value if
subject to impairment.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-54
Chapter 09 - Plant and Intangible Assets
32. A revenue expenditure is an operating expense.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
33. A capital expenditure is charged to owners' capital.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
Multiple Choice Questions
34. After March, 2004 international standards required that goodwill:
A. Be capitalized and amortized over 20 years or less.
B. Be capitalized and amortized over 40 years or less.
C. Be capitalized and reviewed annually and its value should be adjusted if impaired.
D. Be expensed immediately.
AACSB: Reflective Thinking
AICPA BB: Global
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
9-55
Chapter 09 - Plant and Intangible Assets
35. If an asset is determined to be impaired, it should be:
A. Depreciated only using the straight-line method.
B. Written up to its historical cost.
C. Reclassified as a liability.
D. Written down to its fair market value.
AACSB: Ethics
AICPA BB: Industry
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
36. All of the following may be considered intangible assets except:
A. Accounts receivables.
B. Copyrights.
C. Franchises.
D. Goodwill.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
37. The cost of a new windshield wiper on a delivery vehicle would be classified as:
A. A capital expenditure.
B. A revenue expenditure.
C. Part of the cost of goods sold.
D. An unusual and infrequent expense.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
9-56
Chapter 09 - Plant and Intangible Assets
38. When straight-line depreciation is in use, the depreciation rate of an asset is equal to:
A. 1 divided by the life of the asset.
B. 1 divided by the cost of the asset.
C. The cost of the asset divided by the life of the asset.
D. The cost of the asset less its salvage value divided by the life of the asset.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
39. When a depreciable asset is sold at a price equal to its book value, a journal entry would
include:
A. A credit to the asset account for its book value.
B. A debit to accumulated depreciation.
C. A credit to accumulated depreciation.
D. A credit to cash.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
40. All of the following assets are amortized except:
A. Patents.
B. Franchises.
C. Copyrights.
D. Natural resources.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-57
Chapter 09 - Plant and Intangible Assets
41. Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a
survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost
of the land?
A. $256,000.
B. $281,000.
C. $284,600.
D. $282,200.
$256,000 + $15,300 + $2,400 + $8,500 = $282,200
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
42. If the 150% declining balance method is being used and an asset has a useful life of 20
years what is the depreciation rate?
A. 7.5%.
B. 10%.
C. 15%.
D. Some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-58
Chapter 09 - Plant and Intangible Assets
43. Machinery is purchased on May 15, 2009 for $50,000 with a $5,000 salvage value and a
five year life. The half year convention is followed. What method of depreciation will give the
highest amount of depreciation expense in year 2?
A. Straight line
B. Double declining balance
C. 150% declining balance
D. Amount cannot be determined
Straight-line ($50,000 - $5,000)/5 = $9,000,Double-declining-balance Year 1 $50,000 x 2/5 =
$20,000/2 = $10,000, Year 2 $40,000 x 2/5=$16,000; 150% declining-balance Year 1 $50,000
x 1.5/5 = $15,000/2 = $7,500, Year 2 $42,500 x 1.5/5=$12,750
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Evaluate
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
44. An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for
$11,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $1,200.
B. A loss of $1,200.
C. A loss of $7,200.
D. A gain of $7,200.
($18,800 - $6,000) - $11,600 = $1,200 loss
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-59
Chapter 09 - Plant and Intangible Assets
45. The entry to record amortization on a copyright would include:
A. A debit to amortization expense
B. A debit to accumulated amortization
C. A debit to copyright
D. A credit to amortization expense
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
46. Which of the following would not be considered part of the cost of equipment recently
purchased?
A. Sales tax.
B. Transportation charges.
C. Installation and setup charges.
D. All three are capitalized costs.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
47. Armstrong Company recently acquired a new computer system. Which of the following
costs associated with the computer should not be debited to the Equipment account?
A. Insurance coverage purchased by Armstrong to cover the computer during shipment from
the manufacturer.
B. Wages paid to system programmers hired to prepare the new computer for use.
C. Replacement of several circuit boards damaged during installation.
D. Installation of new electrical power supplies required for the computer.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-60
Chapter 09 - Plant and Intangible Assets
48. Coca-Cola's famous name printed in distinctive typeface is an example of:
A. A trademark.
B. A patent.
C. A copyright.
D. Goodwill.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
49. When comparing the units-of-output method of depreciation with straight-line
depreciation:
A. The depreciation expense in the first year will always be greater under units-of-output
method.
B. The depreciation expense in the first year will always be less under the units-of-output
method.
C. The depreciation expense in the first year will always be the same.
D. The depreciation expense in the first year may be greater than, equal to, or less under the
units-of-output method.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-61
Chapter 09 - Plant and Intangible Assets
50. The fair market value of Lewis Company's net identifiable assets is $5,000,000. Martin
Corporation purchases Lewis' entire business for $5,800,000. Which of the following
statements is not correct?
A. Martin Corporation paid $800,000 for goodwill generated by Lewis Company.
B. Martin feels that Lewis Company has the ability to generate earnings in excess of a normal
return on net identifiable assets.
C. Martin will record amortization expense over a period not to exceed 40 years.
D. Martin Corporation will record $800,000 to goodwill, an intangible asset, which will be
reported in its balance sheet.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
51. Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and
an office building with a parking lot. In this situation:
A. The purchase price should be apportioned among the Land, Land Improvement, and
Building accounts.
B. The entire purchase price should be debited to the Plant and Equipment account.
C. Land, Land Improvement, and Building accounts should each be debited for the respective
appraisal value of each item.
D. Allocation of the entire $450,000 to Land results in an understatement of net income in the
current and future accounting periods.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-62
Chapter 09 - Plant and Intangible Assets
52. Which of the following is a capital expenditure?
A. Sales tax paid in conjunction with the purchase of office equipment.
B. Monthly rent of a delivery truck.
C. Research and development costs.
D. Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
53. The legal life of most patents is:
A. 5 years.
B. 20 years.
C. 40 years.
D. 50 years.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
54. Which of the following should not be treated as a revenue expenditure?
A. Delivery costs on newly purchased equipment.
B. Annual fire insurance premiums on plant and equipment.
C. Repair to an elevator of a five year old building.
D. The purchase of a pencil sharpener for $10 used in an office.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
9-63
Chapter 09 - Plant and Intangible Assets
55. Which of the following is not a capital expenditure?
A. Advertising expenditures to introduce a new product line.
B. Sales tax paid in conjunction with the purchase of new machinery.
C. Installation of elevators to replace escalators.
D. An amount paid to acquire a patent with a remaining life of only three years.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
56. The application of the matching principle to depreciation of plant and equipment can best
be described as:
A. The matching of the book value of an asset with its market value.
B. Offsetting the revenue of an accounting period with the estimated decline in value of plant
and equipment during the accounting period.
C. Offsetting revenue of an accounting period with the portion of the cost of plant and
equipment estimated to have been used up during the accounting period.
D. The matching of the depreciation expense reported in the income statement for an
accounting period with the accumulated depreciation reported in the balance sheet.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
9-64
Chapter 09 - Plant and Intangible Assets
57. The term accumulated depreciation, as used in accounting, is best defined as:
A. The portion of a plant asset recognized as expense since the asset was acquired.
B. Funds (or cash) set aside to replace the asset being depreciated.
C. Earnings retained in the business that will be used to purchase another asset when the
present asset is depreciated.
D. An expense of doing business.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
58. Which depreciation method is most commonly used among publicly owned corporations?
A. Straight-line.
B. Double-declining balance.
C. Units-of-output.
D. All of the various depreciation methods are used equally.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
59. The book value of an asset in the plant and equipment category is:
A. The undepreciated cost of the asset.
B. The current replacement cost of the asset.
C. The original cost of the asset.
D. The accumulated depreciation on the asset to date.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-65
Chapter 09 - Plant and Intangible Assets
60. A gain is recognized on the disposal of plant assets when:
A. The sales price is greater than the residual value but less than the book value.
B. The sales price is less than both the book value and the residual value.
C. The sales price is greater than the book value and greater than the residual value.
D. The sales price is greater than the book value and less than the residual value.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
61. Which of the following would not be amortized?
A. Oil well.
B. Copyright.
C. Franchise fee.
D. Patent.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
62. An accelerated depreciation method:
A. Results in reporting higher earnings every year.
B. Depreciates an asset over a shorter life than does the straight-line method.
C. Recognizes more depreciation expense in the early years of an asset's useful life and less in
the later years.
D. Is required for assets that become technologically obsolete before they physically wear out.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-66
Chapter 09 - Plant and Intangible Assets
63. Accelerated depreciation methods are used primarily in:
A. Income tax returns.
B. The financial statements of small businesses.
C. The financial statements of publicly owned corporations.
D. Companies with computer-based accounting systems.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
64. Capital expenditures are recorded as:
A. An expense.
B. An asset.
C. A liability.
D. Income.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
65. In the fixed-percentage-of-declining-balance depreciation method, the book value of the
asset is multiplied by:
A. An increasing depreciation rate.
B. A constant depreciation rate.
C. A decreasing depreciation rate.
D. A rate that changes each year but is determined from a table.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-67
Chapter 09 - Plant and Intangible Assets
66. Revenue expenditures are recorded as:
A. An expense.
B. An asset.
C. A liability.
D. Income.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
67. Which of the following situations is impossible?
A. Book value is greater than residual value.
B. Book value is equal to the residual value.
C. Book value is less than residual value.
D. Book value is less than the original cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
68. For depreciable property other than real estate, MACRS is based upon:
A. Either the 150% or 200% declining-balance method.
B. The straight-line method.
C. A 10-year recovery period.
D. The depreciation method and recovery period used by the company in its financial
statements.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-68
Chapter 09 - Plant and Intangible Assets
69. Which of the following statements about MACRS is not correct?
A. MACRS is the only accelerated depreciation method that may be used on newly acquired
assets for federal income tax purposes.
B. The method permits "depreciating" the asset to a tax basis of $0 over a specified recovery
period.
C. If a company uses MACRS in its income tax returns, it also must use MACRS in its
financial statements.
D. Most businesses would benefit from using MACRS rather than straight-line depreciation in
their income tax returns.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
70. The term net identifiable assets means:
A. All assets minus all liabilities.
B. All assets except goodwill, minus all liabilities.
C. All assets except intangibles, minus all liabilities.
D. All fixed assets less liabilities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-69
Chapter 09 - Plant and Intangible Assets
71. Responsibility for selection of the depreciation methods used in financial reporting rests
with:
A. Company management.
B. The FASB.
C. The IRS.
D. The CPA firm that audits the company's financial statements.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
72. With respect to depreciation policies, the principle of consistency means:
A. A company should use the same depreciation methods in its financial statements that it
uses in its income tax returns.
B. A company should use the same depreciation methods as other companies in the same
industry.
C. A company should use the same depreciation method from year to year for a given plant
asset.
D. A company should use the same depreciation method in computing depreciation expense
on all its assets.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-70
Chapter 09 - Plant and Intangible Assets
73. The book value of plant assets (other than land):
A. Increases with the passage of time.
B. Decreases with the passage of time.
C. Remains the same with the passage of time.
D. May increase or decrease depending upon the economy.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
74. The gain on the disposal of equipment is recognized when:
A. The book value of the equipment is greater than the value received.
B. The book value of the equipment is less than the value received.
C. A salvage value exists.
D. A gain should not be recognized on the disposal of an asset.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
75. For financial reporting purposes, the gain or loss on the sale of a plant asset is determined
by comparing the asset's:
A. Cost with its book value.
B. Sales price with its book value.
C. Tax basis with its book value.
D. Sales price with its tax basis.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-71
Chapter 09 - Plant and Intangible Assets
76. The gain or loss on the disposal of a depreciable asset reported in financial statements
often differs from that reported for income tax purposes. The principal reason for the
difference is:
A. The cost of the asset is different for financial reporting and income tax purposes.
B. The sales price of the asset is different for financial reporting and income tax purposes.
C. Different depreciation methods have been used in financial statements and in income tax
returns.
D. The company has made an error because the same amount of gain or loss should appear in
the income tax return as in the financial statements.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
77. When a company uses straight-line depreciation and the half-year convention, assets with
a five-year life:
A. Will have the same depreciation expense in the first and last years.
B. Will be depreciated over six accounting years.
C. Book value will equal its salvage value at the end of its economic life.
D. All of the above statements are correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-72
Chapter 09 - Plant and Intangible Assets
78. Which of the following assets is not subject to depreciation and whose usefulness does not
decline over time?
A. Patents.
B. Copyrights.
C. Land.
D. Coal mine.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
79. Intangible assets are assets used in business operations but which:
A. Lack physical substance.
B. Cannot be sold.
C. Have been depreciated below their estimated salvage values.
D. Cannot be specifically identified.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
80. For the financial statements of publicly traded companies, MACRS:
A. Is recommended.
B. Is required.
C. Is optional.
D. Is not considered to be in conformity with GAAP.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-73
Chapter 09 - Plant and Intangible Assets
81. The inclusion of the intangible asset goodwill in the financial statements of a company
indicates:
A. That the company has a favorable reputation with its customers.
B. A monopoly position in the industry or superior management.
C. An unbroken record of annual earnings and dividends.
D. That the company has purchased a going business at a price in excess of the fair market
value of the net identifiable assets.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
82. Expenditures for research and development intended to lead to new products of
commercial value:
A. Should be recorded as intangible assets and amortized during the years in which benefits
are expected.
B. Should be charged to expense when incurred.
C. Should be capitalized only if patents are expected to be granted.
D. Should be classified as deferred charges.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
9-74
Chapter 09 - Plant and Intangible Assets
83. The basic purpose of the matching principle is to allocate the cost of an asset to expense
over the years in which the asset contributes to revenue. Current accounting practice does not
strictly apply this principle to expenditures for:
A. Natural resources.
B. Research and development.
C. Trademarks.
D. Equipment.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
84. The adjusting entries to record depreciation or amortization expense or to write down
assets that have become impaired:
A. Reduce both net income and cash balances.
B. Reduce net income, but have no direct effect on cash balances.
C. Decrease cash balances, but have no direct effect upon net income.
D. Affect neither net income nor cash balances.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-75
Chapter 09 - Plant and Intangible Assets
85. Harvard Company purchased equipment having an invoice price of $11,500. The terms of
sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a
$160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as
the cost of this equipment is:
A. $11,845.
B. $12,776.
C. $11,615.
D. $12,546.
($11,500 x .98) + $160 + $185 + $931 = $12,546
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
86. Land and a warehouse were acquired for $890,000. What amounts should be recorded in
the accounting records for land and for the warehouse if an appraisal showed the estimated
values to be $400,000 for the land and $700,000 for the warehouse?
A. $400,000 for land; $490,000 for warehouse.
B. $323,960 for land; $566,040 for warehouse.
C. $400,000 for land; $700,000 for warehouse.
D. $190,000 for land; $700,000 for warehouse.
$400,000 + $700,000 = $1,100,000; $400,000/$1,100,000 = 36.4% x $890,000 = $323,960,
$700,000/$1,100,000 = 63.6% x $890,000 = $566,040
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-76
Chapter 09 - Plant and Intangible Assets
87. On March 2, 2009, Glen Industries purchased a fleet of automobiles at a cost of $550,000.
The cars are to be depreciated by the straight-line method over five years with no salvage
value. Glen uses the half-year convention to compute depreciation for fractional periods. The
book value of the fleet of automobiles at December 31, 2010, will be:
A. $165,000.
B. $400,000.
C. $495,000.
D. $385,000.
($550,000/5) = $110,000/2 = $55,000 (year 1); ($550,000/5) = $110,000 (year 2),
Book value = $550,000 - $55,000 - $110,000 = $385,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
88. On April 8, 2009, Jupitor Corp. acquired equipment at a cost of $480,000. The equipment
is to be depreciated by the straight-line method over six years with no provision for salvage
value. Depreciation for fractional years is computed by rounding the ownership period to the
nearest month. Depreciation expense recognized in 2009 will be:
A. $53,333.
B. $66,667.
C. $60,000.
D. $80,000.
($480,000/6) x 9/12 = $60,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this
machinery is estimated at 8 years, with an $8,000 residual value.
9-77
Chapter 09 - Plant and Intangible Assets
89. Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and the half-year convention. Depreciation expense recognized
on this machinery in 2009 and 2010 will be:
A. $7,500 in 2009 and $11,000 in 2010.
B. $6,000 in 2009 and $12,000 in 2010.
C. $5,000 in 2009 and $10,000 in 2010.
D. $5,500 in 2009 and $11,000 in 2010.
($88,000 - $8,000)/8 = $10,000/2 = $5,000 in 2009 and $10,000 in 2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
90. Refer to the information above. Assume that in its financial statements, Tilton Products
uses straight-line depreciation and rounds depreciation for fractional years to the nearest
month. Depreciation expense recognized on this machinery in 2009 and 2010 will be:
A. $2,333 in 2009 and $7,000 in 2010.
B. $5,833 in 2009 and $10,000 in 2010.
C. $6,667 in 2009 and $10,000 in 2010.
D. $10,000 in 2009 and $10,000 in 2010.
($88,000 - $8,000) = $80,000/8 = $10,000 x 8/12 = $6,667 in 2009 and $10,000 in 2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-78
Chapter 09 - Plant and Intangible Assets
91. Refer to the information above. Assume that in its financial statements, Tilton Products
uses the 200%-declining-balance method and the half-year convention. Depreciation expense
in 2009 and 2010 will be:
A. $11,000 in 2009 and $19,250 in 2010.
B. $22,000 in 2009 and $12,571 in 2010.
C. $22,000 in 2009 and $7,857 in 2010.
D. $11,000 in 2009 and $22,000 in 2010.
$88,000 x 2/8 = $22,000/2 = $11,000 in 2009 and $77,000 x 2/8 = $19,250 in 2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
92. Refer to the information above. Assume that in its financial statements, Tilton Products
uses the 150%-declining-balance method and the half-year convention. Depreciation expense
in 2009 and 2010 will be:
A. $8,250 in 2009 and $14,953 in 2010.
B. $16,500 in 2009 and $12,964 in 2010.
C. $16,500 in 2009 and $16,500 in 2010.
D. $15,000 in 2009 and $11,786 in 2010.
($88,000 x 1.5/8) = $16,500/2 = $8,250 in 2009 and ($88,000 - $8,250) x 1.5/8 = $14,953 in
2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-79
Chapter 09 - Plant and Intangible Assets
93. Refer to the information above. In the year 2015, Tilton Products sells this machinery for
$4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its
estimated residual value of $8,000. This sale results in:
A. A $3,500 loss in both the company's financial statements and income tax return.
B. No gain or loss in either the financial statements or income tax return.
C. A $3,500 loss in the financial statements, a $3,500 gain in the income tax return.
D. A $3,500 loss in the financial statements, but no gain or loss in the income tax return.
$8,000 - $4,500 = $3,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
On April 2, 2009, Victor, Inc. acquired a new piece of filtering equipment. The cost of the
equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful
lifetime of 4 years.
94. Refer to the information above. Assume that in its financial statements, Victor uses
straight-line depreciation and rounds depreciation for fractional years to the nearest whole
month. Depreciation recognized on this equipment in 2009 and 2010 will be:
A. $23,333 in 2009 and $35,000 in 2010.
B. $40,000 in 2009 and $30,000 in 2010.
C. $20,000 in 2009 and $35,000 in 2010.
D. $26,250 in 2009 and $35,000 in 2010.
($160,000 - $20,000)/4 = $35,000 x 9/12 = $26,250 for 2009 and $35,000 for 2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-80
Chapter 09 - Plant and Intangible Assets
95. Refer to the information above. Assume that in its financial statements, Victor uses
straight-line depreciation and the half-year convention. Depreciation recognized on this
equipment in 2009 and 2010 will be:
A. $40,000 in 2009 and $30,000 in 2010.
B. $23,333 in 2009 and $30,000 in 2010.
C. $17,500 in 2009 and $35,000 in 2010.
D. $20,000 in 2009 and $35,000 in 2010.
($160,000 - $20,000)/4 = $35,000/2 = $17,500 for 2009 and $35,000 for 2010
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
96. Refer to the information above. If Victor uses straight-line depreciation with the half-year
convention, the book value of the equipment at December 31, 2010 will be:
A. $90,000.
B. $107,500.
C. $106,667.
D. $105,000.
$160,000 - $17,500 - $35,000 = $107,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
9-81
Chapter 09 - Plant and Intangible Assets
97. Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful
life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used.
On January 1, following six full years of use of the machinery, management decided that the
estimate of useful life had been too long and that the machinery would have to be retired after
three years, that is, at the end of the ninth year of service. Under this revised estimate, the
depreciation expense for the seventh year of use would be:
A. $8,000.
B. $10,000.
C. $13,000.
D. $24,000.
($80,000 - $20,000)/10 = $6,000 x 6 = $36,000; $60,000 - $36,000 = $24,000/3 = $8,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
98. Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated
depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under
these circumstances, the original cost of the asset must have been:
A. $65,000.
B. $75,000.
C. $100,000.
D. $110,000.
(x - $70,000) = $5,000 + $35,000; x = $110,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-82
Chapter 09 - Plant and Intangible Assets
99. Mayer Instrumentation sold a depreciable asset for cash of $300,000. The original cost of
the asset was $1,200,000. Mayer recognized a gain of $45,000 on the sale. What was the
amount of accumulated depreciation on the asset at the time of its sale?
A. $945,000.
B. $255,000.
C. $1,155,000.
D. $990,000.
($1,200,000 - x) = $300,000 - $45,000; x = $945,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
100. Suffolk Associates sold office furniture for cash of $42,000. The accumulated
depreciation at the date of sale amounted to $38,000, and a gain of $18,000 was recognized on
the sale. The original cost of the asset must have been:
A. $31,000.
B. $62,000.
C. $84,000.
D. $59,000.
x - $38,000 = $42,000 - $18,000; x = $62,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-83
Chapter 09 - Plant and Intangible Assets
101. Total stockholders' equity of Tucker Company is $4,000,000. The fair market value of
Tucker's net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation
makes an offer to purchase Tucker's entire business for $5,800,000. In this situation:
A. Tucker Company should report goodwill of $800,000 in its balance sheet.
B. Tucker Company should report goodwill of $1,800,000 in its balance sheet.
C. Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and
Empire will report this goodwill in its balance sheet if the purchase is finalized.
D. Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and
Empire will report this goodwill in its balance sheet if the purchase is finalized.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
102. Early in the current year, Tokay Co. purchased the Silverton Mine at a cost of
$20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a residual
value of $5,000,000 after mining operations are completed. During the year, 105,000 tons of
ore were removed from the mine. At year-end, the book value of the mine (cost minus
accumulated depletion) is:
A. $15,000,000.
B. $12,125,000.
C. $7,875,000.
D. Less than $10,000,000.
($20,000,000 - $5,000,000)/200,000 = $75 x 105,000 = $7,875,000, $20,000,000 - $7,875,000
= $12,125,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-07 Account for the depletion of natural resources.
Topic: Natural Resources
9-84
Chapter 09 - Plant and Intangible Assets
103. In February 2009, Brilliant Industries purchased the Topaz Mine at a cost of
$10,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual
value of $500,000 after mining operations are completed. During 2009, 50,000 carats of stone
were removed from the mine and sold. In this situation:
A. The book value of the mine is $9,000,000 at the end of 2009.
B. The amount of depletion deducted from revenue during 2009 is $950,000.
C. The amount of depletion deducted from revenue during 2009 is $1,000,000.
D. The mine is classified as an intangible asset and amortized over a period not to exceed 40
years.
($10,000,000 - $500,000)/500,000 = $19 x 50,000 = $950,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-07 Account for the depletion of natural resources.
Topic: Natural Resources
104. Land is purchased for $456,000. Additional costs include a $30,300 fee to a broker, a
survey fee of $3,400, $2,750 to construct a fence, and a legal fee of $12,500. What is the cost
of the land?
A. $456,000.
B. $486,300.
C. $502,200.
D. $504,950.
$456,000 + $30,300 + $3,400 + $12,500 = $502,200
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-85
Chapter 09 - Plant and Intangible Assets
105. An asset which costs $97,600 and has accumulated depreciation of $82,000 is sold for
$18,000. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $15,600.
B. A loss of $15,600.
C. A loss of $2,400.
D. A gain of $2,400.
($97,600 - $82,000) - $18,000 = $2,400 gain
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
106. Yale Company purchased equipment having an invoice price of $21,500. The terms of
sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320
delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the
cost of this equipment is:
A. $21,070.
B. $21,500.
C. $21,740.
D. $22,923
($21,500 x .98) + $320 + $350 + $1,183 = $22,923
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
9-86
Chapter 09 - Plant and Intangible Assets
107. Early in the current year, Amazon Co. purchased the Rio Silver Mine at a cost of
$30,000,000. The mine was estimated to contain 400,000 tons of ore and to have a residual
value of $7,500,000 after mining operations are completed. During the year, 115,000 tons of
ore were removed from the mine. At year-end, the book value of the mine is:
A. $22,500,000.
B. $6,468,750.
C. $23,531,250.
D. $30,000,000.
($30,000,000 - $7,500,000)/400,000 = $56.25 x 115,000 = $6,468,750; $30,000,000 $6,468,750 = $23,531,250
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-07 Account for the depletion of natural resources.
Topic: Natural Resources
108. In February 2012, Gemstone Industries purchased the Opal Mine at a cost of
$20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual
value of $1,000,000 after mining operations are completed. During 2012, 50,000 carats of
stone were removed from the mine and sold. In this situation:
A. The book value of the mine is $19,000,000 at the end of 2012.
B. The amount of depletion deducted from revenue during 2012 is $1,900,000.
C. The amount of depletion deducted from revenue during 2012 is $1,000,000.
D. The mine is classified as an intangible asset and amortized over a period not to exceed 40
years.
($20,000,000 - $1,000,000)/500,000 = $38 x 50,000 = $1,900,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 09-07 Account for the depletion of natural resources.
Topic: Natural Resources
9-87
Chapter 09 - Plant and Intangible Assets
109. Lewis Imports sold a depreciable plant asset for cash of $135,000. The accumulated
depreciation amounted to $170,000, and a loss of $15,000 was recognized on the sale. Under
these circumstances, the original cost of the asset must have been:
A. $120,000.
B. $155,000.
C. $185,000.
D. $320,000.
(x - $170,000) = $15,000 + $135,000; x = $320,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
110. Cranston Instrumentation sold a depreciable asset for cash of $150,000. The original cost
of the asset was $600,000. Cranston recognized a gain of $22,500 on the sale. What was the
amount of accumulated depreciation on the asset at the time of its sale?
A. $472,500.
B. $127,500.
C. $577,500.
D. $495,000.
($600,000 - x) = $150,000 - $22,500; x = $472,500
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
9-88
Chapter 09 - Plant and Intangible Assets
111. Glouchester Associates sold office equipment for cash of $142,000. The accumulated
depreciation at date of sale amounted to $138,000, and a gain of $18,000 was recognized on
the sale. The original cost of the asset must have been:
A. $260,000.
B. $262,000.
C. $280,000.
D. $156,000.
x - $138,000 = $142,000 - $18,000; x = $262,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Hard
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
112. An asset which costs $14,400 and has accumulated depreciation of $8,000 is sold for
$5,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $800.
B. A loss of $800.
C. A loss of $2,400.
D. A gain of $2,400.
($14,400 - $8,000) - $5,600 = $800 loss
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
9-89
Chapter 09 - Plant and Intangible Assets
113. An asset which costs $28,800 and has accumulated depreciation of $6,000 is sold for
$21,600. What amount of gain or loss will be recognized when the asset is sold?
A. A gain of $1,200.
B. A loss of $1,200.
C. A loss of $7,200.
D. A gain of $7,200.
($28,800 - $6,000) - $21,600 = $1,200 loss
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-04 Account for depreciation using methods other than straight-line or declining-balance.
Topic: Other Depreciation Methods
Essay Questions
9-90
Chapter 09 - Plant and Intangible Assets
114. Accounting terminology. Listed below are nine technical accounting terms introduced in
this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or Answer
"None" if the statement does not correctly describe any of the terms.
____ (a.) An expenditure to pay an expense of the current period.
____ (b.) The accelerated depreciation system used in federal income tax returns for
depreciable assets purchased after 1986.
____ (c.) A policy that fractional-period depreciation on assets acquired or sold during the
period should be computed to the nearest month.
____ (d.) An intangible asset representing the present value of future earnings in excess of
normal return on net identifiable assets.
____ (e.) Expenditures that could lead to the introduction of new products, but which,
according to the FASB, should be viewed as an expense of the current accounting period.
____ (f.) Depreciation methods that take less depreciation in the early years of an asset's
useful life, and more depreciation in the later years.
____ (g.) An account showing the portion of the cost of a plant asset that has been written off
to date as depreciation expense.
(a) Revenue expenditure, (b) MACRS, (c) None (The statement describes the alternative to
the half-year convention), (d) Goodwill, (e) Research and development, (f) None (Accelerated
depreciation methods take more depreciation in the early years and less in later years), (g)
Accumulated depreciation
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 09-01 Determine the cost of plant assets.
Learning Objective: 09-08 Explain the cash effects of transactions involving plant assets.
Topic: Plant and Intangible Assets
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Chapter 09 - Plant and Intangible Assets
115. Determining cost of plant assets
New equipment was purchased by Hunter Corporation at a list price of $94,000, with credit
terms of 2/10, n/30. Payment was made within the discount period and included $7,800 sales
tax in addition to the net purchase price. The company also paid delivery charges of $940 and
labor costs of $1,380 for installing the new equipment at the appropriate location. During
installation, an inexperienced employee punctured several containers with a forklift, causing
damage to the equipment. Cost to repair the damage was $1,960. What is the total cost of
Hunter's equipment?
Cost is $102,240 [$94,000 - ($94,000 x 2%) + $7,800 + $940 + $1,380 = $102,240]
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
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Chapter 09 - Plant and Intangible Assets
116. Depreciation in financial statements
Dynasty Co. uses straight-line depreciation in its financial statements, with depreciation for a
partial year rounded to the nearest full month.
On September 28, 2006 Dynasty purchased equipment at a cost of $140,000. For financial
reporting purposes, the useful life of this equipment was estimated at 5 years, with a $30,000
salvage value.
Compute the depreciation expense relating to this equipment that Dynasty will recognize in its
financial statements in the following years. If no depreciation will be recognized in a
particular year, write zero.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
117. Various depreciation methods-first year
On September 5, 2009, Apollo purchased equipment costing $40,000, with an estimated life
of 6 years and an estimated salvage value of $4,000.
Compute the depreciation expense Apollo would recognize on this equipment in 2009,
assuming:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
118. Various depreciation methods-first year
On March 24, 2009 Tastee Ice Cream Co. purchased equipment costing $140,000, with an
estimated life of 5 years and an estimated salvage value of $20,000. Compute the depreciation
expense Tastee would recognize on this equipment in 2009, assuming:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
119. Various depreciation methods--two years
On September 6, 2010, East River Tug Co. purchased a new tugboat for $400,000. The
estimated life of the boat was 20 years, with an estimated residual value of $40,000.
Compute the depreciation on this tugboat in 2010 and 2011 using the following methods.
Apply the half-year convention. (If necessary, round to the nearest dollar.)
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
120. Declining balance depreciation
On July 6, 2011, Grayson purchased new machinery with an estimated useful life of 10 years.
The cost of the equipment was $80,000, with a residual value of $8,000.
Compute the depreciation on this machinery in 2011 and 2012 using each of the following
methods.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
121. Depreciation; gains and losses in financial statements
In 2010, Amalfi, Inc. purchased equipment with an estimated 10-year life for $42,600. The
residual value was estimated at $9,900. Amalfi uses straight-line depreciation and applies the
half-year convention.
On April 18, 2012, Amalfi closed one of its plants and sold this equipment for $33,600. Under
these assumptions, compute the following for this equipment:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
122. Trade-ins
Dietz owned a delivery van with a book value of $2,000. It traded this old van in on a new
one which cost $16,000. The dealer allowed Dietz a trade-in allowance of $3,500 on the old
van, and Dietz paid the remainder in cash.
Compute the following:
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
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Chapter 09 - Plant and Intangible Assets
123. Depreciation and disposal--a comprehensive problem
Domino, Inc uses straight-line depreciation with a half-year convention in its financial
statements. On March 10, 2006, Domino acquired a computer system at a cost of $98,800.
Estimated useful life is six years, with residual value of $5,200.
(a) Complete the following schedule, showing depreciation expense Domino expects to
recognize each year in the financial statements.
(b) Assume Domino sells the computer system on October 3, 2009, for $26,650.
(a) Depreciation Recognized in Financial Statements
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Chapter 09 - Plant and Intangible Assets
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
124. Computation of goodwill
The income of Greystone, Inc., during the last several years has averaged $765,000 annually.
The company is now being offered for sale as a going concern. The value of Greystone's net
identifiable assets (total assets minus all liabilities) at the present time is $4,675,000.
One of several corporations interested in buying Greystone, offers to pay an amount equal to
the value of the net identifiable assets and to assume all liabilities. In addition, this
prospective buyer is willing to pay for goodwill an amount equal to net earnings in excess of
10% on net assets, expected to continue four years.
You are to use the above information as a basis for computing the price that the investing
corporation will offer for Greystone, Inc. $_______________
$5,865,000
Computations
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
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Chapter 09 - Plant and Intangible Assets
125. Computation of goodwill
Chopin Corporation has net assets (total assets minus total liabilities) valued at $880,000 and
has earned an average net income of $132,000 per year for the past several years. Sands
Company is negotiating the purchase of the company and has agreed to pay an amount equal
to the value of the net identifiable assets, assume the liabilities, and pay a sum for goodwill
equal to the earnings in excess of 12% on net assets, expected to continue for five years. What
is the amount for goodwill Sands is including in its offer? $_______________
$132,000
Computations
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
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Chapter 09 - Plant and Intangible Assets
126. Caan purchased the Stokes Mine for $60 million. The mine was estimated to contain 6
million tons of anthracite coal and to have a residual value of $12 million. During the first
year of mining operations of the Stokes Mine, 800,000 tons of anthracite were mined of which
600,000 tons was sold.
(a) Depletion recognized in first year = $6,400,000
= [($60,000,000 - $12,000,000)  6,000,000 tons] x 800,000 tons
(b) Cost of goods sold = $4,800,000 = $8 per ton x 600,000 tons
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-07 Account for the depletion of natural resources.
Topic: Natural Resources
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Chapter 09 - Plant and Intangible Assets
127. Four events pertaining to plant assets are described below.
(a) Computed depreciation for use in the annual income tax return (a different method is used
in the financial statements).
(b) Made a year-end adjusting entry to record depreciation expense for financial reporting
purposes.
(c) Sold old equipment for cash at a price below its book value, but above its income tax
basis.
(d) Traded an old automobile in on a new one. The dealer granted a trade-in allowance on the
old vehicle that was substantially above its book value and its tax basis. However, the trade-in
allowance amounted to only a small portion of the price of the new car; most of the purchase
price was paid in cash.
Indicate the immediate effects of each of these events upon the financial measurements in the
four column headings listed below. Use the code letters, I for increase, D for decrease, and
NE for no effect.
Note: Indicate only the immediate effects of each transaction. Do not attempt to anticipate
how changes in taxable income will affect future cash flows.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
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Chapter 09 - Plant and Intangible Assets
128. Briefly explain the difference between a revenue expenditure and a capital expenditure.
Capital expenditures are recorded as assets on the balance sheet and are depreciated over time,
eventually becoming an expense on the income statement.
Revenue expenditures are recorded as an expense on the income statement in the current
period.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-02 Distinguish between capital expenditures and revenue expenditures.
Topic: Acquisition of Plant Assets
129. Effects of depreciation on income and cash flows
In its financial statements, Flysafe Airlines has for many years depreciated its aircraft over an
estimated useful life of 12 years. In preparing this year's financial statements, management
decided to revise the estimate from 12 years to 15. Briefly explain how this revision in
estimated life is likely to affect this year's:
(a) Net income.
(b) Net cash flow.
(c) Taxable income.
(a) By increasing the estimated useful life of depreciable assets, management reduces the
amount of depreciation expense recognized for the current year. Therefore, this change in
estimated useful life will increase the amount of net income reported for the current year.
(b) The recognition of depreciation expense involves no immediate cash outlay. Therefore,
changing the assumptions underlying the computation of depreciation expense has no effect
upon cash flows of the current period.
(c) The useful life used to depreciate assets in financial statements has no effect upon the
depreciation reported for tax purposes or, therefore, upon taxable income. For tax purposes,
Flysafe Airlines will continue to depreciate its aircraft over the stipulated MACRS recovery
period.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Topic: Depreciation
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Chapter 09 - Plant and Intangible Assets
130. Gains and losses in financial statements and tax returns
Explain why the amount of gain or loss resulting from the sale of a depreciable asset usually
differs between the seller's financial statements and income tax return. In which of these
accounting reports is the gain usually larger (or the loss smaller)? Explain your reasoning.
The gain or loss on disposal of a plant asset for financial reporting purposes is the difference
between the sales price and the asset's book value. For tax purposes, the gain or loss is the
difference between sales price and the asset's tax basis. Because different depreciation
methods generally are used for financial reporting purposes and tax purposes, book value and
tax basis often are different amounts. This, in turn, leads to different amounts of gain or loss
upon disposal of the asset.
Most companies use straight-line depreciation for financial reporting purposes and accelerated
methods such as MACRS in their income tax returns. Thus, tax basis tends to be lower than
book value, resulting in a larger gain (or smaller loss) being reported in the income tax return.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Disposal of Plant and Equipment
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Chapter 09 - Plant and Intangible Assets
131. Goodwill-financial reporting considerations
Cabot Corporation's balance sheet at December 31, 2009, includes an asset entitled goodwill
in the amount of $900,000, net of accumulated amortization.
(a) Briefly explain what is meant by the term goodwill.
(b) Under what circumstances is goodwill recorded in the accounting records? Include in your
Answer a specific situation in which Cabot would have recorded the goodwill mentioned
above.
(a) Goodwill is an intangible asset; the dollar figure initially assigned to this intangible asset
represents the present value of future earnings in excess of the normal return on a business's
net identifiable assets. Goodwill exists whenever a company can generate future earnings in
excess of what is considered a "normal" return on its net identifiable assets, relative to other
firms in its industry.
(b) Goodwill is recorded in the accounting records only when it is purchased; this situation
usually occurs only when a going business is purchased in its entirety. The fact that Cabot
reports goodwill in its balance sheet indicates that Cabot purchased an existing business,
paying an amount in excess of the value of the identifiable net assets of the purchased
business. The $900,000 figure is net of accumulated amortization for an unknown number of
years, therefore the initial amount of the goodwill paid for by Cabot cannot be determined
precisely.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
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Chapter 09 - Plant and Intangible Assets
132. Research and development-financial reporting
Alert Industries has spent $5 billion over the last three years in developing a new drug labeled
BJ13. FDA approval is expected by the end of the month, at which time the drug will be
available for sale. None of Alert's competitors has a product similar to BJ13, and the medical
community is anxiously awaiting availability of this drug. Although BJ13 promises to be a
"wonder drug" with huge financial success, Alert's income statements for the last few years
have shown substantial losses and Alert's balance sheet does not include product BJ13 among
the assets of the business.
Explain why one of Alert's seemingly most valuable assets apparently has been omitted from
the balance sheet, and why Alert's income statements for the past few years reported
substantial losses.
Generally accepted accounting principles currently require that amounts spent for research
and development be expensed as incurred. This would result in $5 billion of expenses for R &
D over the last three years, which contributed to and may have been responsible for the
substantial losses reported by Alert. Because amounts spent on R & D must be expensed,
these amounts are not capitalized or reported as assets. In the case of firms heavily involved in
R & D activities, there are frequently no dollar amounts, or very insignificant amounts, in the
balance sheet representing these companies' most valuable assets.
AACSB: Communications
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 09-06 Explain the nature of intangible assets; including goodwill.
Topic: Intangible Assets
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Chapter 09 - Plant and Intangible Assets
133. Prepare journal entries for the following
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Learning Objective: 09-03 Compute depreciation by the straight-line and declining-balance methods
Learning Objective: 09-05 Account for the disposal of plant assets.
Topic: Acquisition of Plant Assets, Depreciation, Disposal of Plant and Equipment
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Chapter 09 - Plant and Intangible Assets
134. The following expenditures are related to land, land improvements, and buildings, which
were acquired on November 1, 2009.
Required:
Determine the cost of the land, the building and the improvements (Round to the nearest
dollar)
Prepare journal entries on December 31, 2009 for depreciation assuming the building will
have a useful life of 20 years and no residual value. Use double declining balance method and
the half-year convention. Depreciate the land improvements using straight-line method, a 5
year life, to the nearest month with zero residual value (to the nearest dollar).
The cost of the land is $309,800 ($262,800 + $20,000 + $8,500 + $12,500 + $3,500 + $2,500)
The cost of the building is $110,250 ($102,200 + $6,750 + $1,300)
The cost of the land improvements is $17,000 ($7,000 + $9,250 + $750)
Journal entries
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 09-01 Determine the cost of plant assets.
Topic: Acquisition of Plant Assets
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Chapter 09 - Plant and Intangible Assets
Multiple Choice Questions
On March 12, 2008, Shoreham, Inc. acquired melting equipment for $45,600. The estimated
life of the equipment is 6 years, with an estimated residual value of $2,400.
135. In its financial statements, Shoreham uses straight-line depreciation with the half-year
convention. The book value of the equipment at December 31, 2009, will be:
A. $26,600.
B. $42,000.
C. $34,800.
D. Some other amount.
136. In its financial statements, Shoreham uses double-declining-balance depreciation with
half-year convention. The book value of the equipment at December 31, 2009, will be:
A. $20,267.
B. $12,667.
C. $25,333.
D. Some other amount.
137. Sayville Dairy sold a delivery truck for cash of $8,680. The original cost of the truck was
$33,600, and a loss of $5,320 was recognized on the sale. The accumulated depreciation at the
date of sale must have been:
A. $24,920.
B. $14,560.
C. $3,360.
D. $19,600.
138. Cage Corporation purchases Presley Company's entire business for $2,700,000. The fair
market value of Presley's net identifiable assets is $2,400,000.
A. Presley should record goodwill of $300,000.
B. Cage paid $300,000 for goodwill generated by Presley.
C. Cage should charge the $300,000 excess paid for Presley Company directly to expense.
D. Presley should record amortization over a period not to exceed 40 years.
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Chapter 09 - Plant and Intangible Assets
139. Throughout the current year, Calverton Company treated sales taxes paid on purchases of
plant assets as revenue expenditures. As a result, the current year's:
A. Net income is overstated.
B. Revenue is overstated.
C. Depreciation expense is understated.
D. None of the above; payments of sales taxes should be treated as revenue expenditures.
On May 5, 2009, Lloyd purchased a machine for $84,000. The estimated life of the machine
was 10 years, with an estimated residual value of $10,000. The service life in terms of
"output" is estimated at 8,000 hours of operation.
140. Assume Lloyd uses straight-line depreciation with the half-year convention.
Depreciation expense to be recognized in 2009 (the year of purchase) is:
A. $7,400.
B. $8,400.
C. $3,700.
D. Some other amount.
141. Assume Lloyd uses 200%-declining-balance depreciation with the half-year convention.
Depreciation expense to be recognized in 2010 (the second year of ownership) is:
A. $8,400.
B. $13,120.
C. $15,120.
D. Some other amount.
142. Assume Lloyd uses 150%-declining-balance depreciation with the half-year convention.
Depreciation expense to be recognized in 2009 (the year of purchase) is:
A. $8,400.
B. $6,300.
C. $12,600.
D. Some other amount.
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Chapter 09 - Plant and Intangible Assets
143. Assume Lloyd uses the units-of-output method and that the machine was in operation for
1,000 hours in 2009 and 1,800 hours in 2010. The book value of the machine at December 31,
2010 is:
A. $48,100.
B. $58,100.
C. $25,900.
D. Some other amount.
Short Answer Questions
On April 8, 2010, Dreamland Park purchased a ferris wheel for $300,000. The estimated life
of the ferris wheel was 10 years, with an estimated residual value of $60,000. The service life
in terms of output is estimated at 30,000 hours of operation.
Compute the depreciation on this ferris wheel in 2010 and 2011 using the following methods.
2010 2011
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Chapter 09 - Plant and Intangible Assets
144.
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Chapter 09 - Plant and Intangible Assets
Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winning stallion on
January 1, 2003. The stallion is depreciated on a straight-line basis, with depreciation for
partial years rounded to the nearest month. Estimated useful life was nine years, with no
residual value. After owning the animal for six years and five months, Louisville Farms sold
the stallion on May 31, 2009, for cash of $85,000. Depreciation had last been recorded on
December 31, 2008.
145. Compute to the nearest full month depreciation for the fractional period from January 1,
2009 to May 31 of 2009. $______________
$20,000
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Chapter 09 - Plant and Intangible Assets
146. Compute the book value of the stallion at May 31, 2009, the date of sale.
$______________
$124,000
147. Compute the gain or loss on the sale of the stallion. $______________ (gain/loss)
$39,000 loss
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Chapter 09 - Plant and Intangible Assets
148. In the space provided below, prepare the journal entry to record the sale of the stallion on
May 31, 2009. (Use Breeding Stock as the title of the asset account. Assume that depreciation
to date of sale already has been recorded.)
Multiple Choice Questions
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Chapter 09 - Plant and Intangible Assets
149. In which of the following situations should the named company not record any
depreciation expense on the asset described?
A. Commuter Airline is required by law to maintain its aircraft in "as good as new" condition.
B. Metro Advertising owns an office building that has been increasing in value each year
since it was purchased.
C. Computer Sales Company has in inventory a new type of computer designed "never to
become obsolete."
D. None of the above answers is correct―in each case, the named company should record
depreciation on the asset described.
150. Which of the following statements is (are) correct?
A. Accumulated depreciation represents a fund being accumulated for the replacement of
plant assets.
B. The cost of a machine includes the cost of repairing damage to the machine during the
installation process.
C. A company may use different depreciation methods in its financial statements and its
income tax return.
D. The use of an accelerated depreciation method causes an asset to wear out more quickly
than does use of the straight-line method.
151. On April 1, 2010, Sanders Construction paid $10,000 for equipment with an estimated
useful life of 10 years and a residual value of $2,000. The company uses the double-decliningbalance method of depreciation and applies the half-year convention to fractional periods. In
2011, the amount of depreciation expense to be recognized on this equipment is:
A. $1,600.
B. $1,400.
C. $1,280.
D. Some other amount.
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Chapter 09 - Plant and Intangible Assets
152. Evergreen Mfg. is a rapidly growing company that acquires more equipment every year.
Evergreen uses straight-line depreciation in its financial statements and MACRS in its tax
returns. Identify all correct statements:
A. Using straight-line depreciation in the financial statements instead of an accelerated
method increases Evergreen's reported net income.
B. Using straight-line depreciation in the financial statements instead of an accelerated
method increases Evergreen's annual net cash flow.
C. Using an accelerated method instead of straight-line in income tax returns increases
Evergreen's net cash flow.
D. As long as Evergreen keeps growing, it will report more depreciation in its income tax
returns each year than it does in its financial statements.
153. Ladd Company sold a plant asset that originally had cost $50,000 for $22,000 cash. If
Ladd correctly reports a $5,000 gain on this sale, the accumulated depreciation on the asset at
the date of sale must have been:
A. $33,000.
B. $28,000.
C. $23,000.
D. Some other amount.
154. In which of the following situations would Martinez Industries include goodwill in its
balance sheet?
A. The fair market value of Martinez's net identifiable assets amounts to $2,000,000. Normal
earnings for this industry is 15 percent of net identifiable assets. Martinez's net income for the
past five years has averaged $390,000.
B. Martinez spent $800,000 during the current year for research and development for a new
product which promises to generate substantial revenue for at least 10 years.
C. Martinez acquired Baxter Electronics at a price in excess of the fair market value of
Baxter's net identifiable assets.
D. A buyer wishing to purchase Martinez's entire operation has offered a price in excess of
the fair market value of Martinez's net identifiable assets.
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